trading news reports

GBP/USD: Trading the Change in U.K. Public Sector Borrowing

Public sector net borrowing in the U.K. is forecasted to increase GBP 19.0B in December after rising at a record pace during the previous month, and the data could stoke increased selling pressures on the British Pound as investors weigh the long-term outlook for the economy.

Trading the News: U.K. Public Sector Net Borrowing

What’s Expected
Time of release:        01/21/2010 09:30 GMT, 04:30 EST
Primary Pair Impact :    GBPUSD
Expected:         19.0B
Previous:         20.3B

Effects the U.K. Public Sector Net Borrowing has had over GBPUSD for the past 2 months

November 2009 U.K. Public Sector Net Borrowing

Public sector net borrowing in the U.K. jumped GBP 20.3B in November to mark the largest budget short-fall since recordkeeping began in 1993, but fell short of expectations for a GBP 23.0B rise. A spokesman from the HM Treasury said that the figures are largely in-line with the forecasts from Chancellor of the Exchequer Alistair Darling, while Moody’s Investor Services cautioned that the U.K. will need to temper the rise in the budget deficit to maintain its AAA rating. Mr. Darling pledged to cut the short-fall in half over the next four years and aims to normalize policy as the economy emerges from the worst recession since the post-war period however, managing the public budget may get increasingly difficult over the coming months as policy makers expect unemployment to push higher going into the following year.

October 2009 Public Sector Net Borrowing

The budget deficit in the U.K. for the month of October rose to its highest level since record keeping began in 1993 as the recession weighed on tax revenues. Public sector net borrowing jumped GBP 11.4B after rising GBP 0.1B in the previous year, which exceeded economists’ expectations for a GBP 7.0B rise, the office for National Statistics said in London. At the same, a measure of the cash entering and leaving the Treasury showed the deficit widened to 5.9 billion pounds in October as compared to a 2.5 billion-pound surplus a year earlier, while net debt advanced to 829.7 billion pounds , marking the highest level since at least 1974.  Meanwhile, a treasury spokesman said the figures are in line with forecasts made at the annual budget statement in April, which reflects the loss of tax receipts and the rise in government spending.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on GBPUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on GBPUSD ahead of the data release.

How To Trade This Event Risk

Public sector net borrowing in the U.K. is forecasted to increase GBP 19.0B in December after rising at a record pace during the previous month, and the data could stoke increased selling pressures on the British Pound as investors weigh the long-term outlook for the economy. The National Institute of Economic and Social Research said the United Kingdom emerged from the recession in the fourth quarter and forecasts the growth rate to expand 0.3% from the three-months through September, and said that a “recovery is starting to emerge” as the expansion in monetary and fiscal policy continues to feed through the real economy. At the same time, Fitch Ratings reaffirmed the Bank of England’s ‘AAA” Long-term Issuer Default Rating and held a ‘stable’ outlook for the U.K.’s sovereign credit rating as Chancellor of the Exchequer Alistair Darling pledges to cut the deficit in half over the next four-years. Meanwhile, Prime Minister Gordon Brown argued that the government’s effort to curb public borrowing must be “sensible” and “fair” as the recovery remains “fragile,” and went onto say that the administration will “reduce the deficit at a responsible pace, without choking off the recovery or damaging the frontline services the mainstream majority rely on.” Nevertheless, the BoE voted unanimously to keep the benchmark interest rate at the record-low of 0.50% and maintain its GBP 200B asset purchase program in order to encourage a sustainable recovery, but went onto say that “a significant fiscal consolidation was needed in the United Kingdom” as the central bank aims to normalize policy this year. Moreover, Governor Mervyn King argued that “uncertainty about how and when fiscal policy will respond has a direct bearing on monetary policy” during at speech at Exeter University, and went onto say that “there is uncertainty over the timing of fiscal consolidation” as government officials continue to see a risk for a protracted recovery. As the BoE seek to secure a sustainable rebound in economic activity, the MPC is likely to maintain a dovish outlook for future policy however, board member Andrew Sentence said that the central bank should halt its GBP 200B plan during an interview with the Guardian newspaper and stated that the board could adopt a ‘wait and see’ approach as the “recovery gathers momentum.

Trading the given event risk favors a bearish outlook for the British Pound as market participants anticipate the budget deficit to rise further in December but nevertheless, a smaller-than-expected rise in public borrowing could drive the exchange rate higher as the economy returns to growth. Therefore, if public borrowing rises GBP 12.0B or less from the previous month, we would need a green, five-minute candle following the release in order to confirm a buy entry on two-lots of GBP/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance, and this risk will determine our first objective. Our second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its objective in an effort to preserve our profits.

In contrast, fears of a protracted recovery may lead the government to maintain the rise in public spending, and the downturn in tax revenues are likely to drive the budget deficit higher as policy makers continue to support the ailing economy. As a result, if public borrowing rises GBP 19.0B or greater in December, we will favor a bearish outlook for Cable, and will utilize the same setup for a short pound-dollar trade as the short position laid out above, just in reserve.

Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

Resources

• free demo account
• forex courses
• open an account
• real time news
• free webinars